TOKYOThe crowded, brightly-lit back alleys and winding thorough-fares of Tokyo's Shibuya district can, at night, resemble a futuristic fantasyland. Against the backdrop of neon-wrapped skyscrapers and noisy video billboards, groups of teenagersmany of them wearing Captain Kirk-like black pants and T-shirtssport orange hair, headsets and mobile-phone packs hanging from their belt loops like space-age weaponry. From coffee shop to train platform, people talk and type into cutting-edge mobile phones. The small, slender devices fold up like business card holders, have tiny, scaled-down, color screens that display complex graphics, and they're hotwired to the Web 24/7.

William Gibson, a science-fiction writer who was inspired by the "Tomorrowland" feel of Tokyo's urban landscape, once observed that "the future is already upon us, it is just unevenly distributed." If the mobile Internet is the future, then Tokyo is certainly where most of it is distributed right now, and Tsutaya, Japan's largest video and CD entertainment chain, is one of the more telling examples of what's possible with m-commerce. Tsutaya, which is the retail brand of parent company Culture Convenience Club Ltd., is not only proving with its online arm that it can use the mobile Internet to drum up more customers, manage costs and boost sales; it's showing others in the business world how a good database and always-on mobile Internet channels can help companies take the pulse of their customers anytime, anywhereliterally by reaching into their pockets, via i-Mode wireless services and devices, and data-tracking their whims.

The key is Tsutaya's ability to marry a rich database to mobility. Says Kirk Kramer, a Hong Kong-based vice president at Mercer Management Consulting: "Tsutaya realizes that being able to sample the population's pulse in real time is central to its success." Tsutaya founder Muneaki Masuda agrees: "We're not interested in merely renting videos to people. We're collecting lifestyle information, and the possibilities of that are, over time, enormous."

To be sure, the wireless Internet has failed to catch on in every part of the world except Japan. WAP, the wireless application protocol that was supposed to put mobile phone users on the Internet in the U.S. and Europe, has had a slew of problems, including slow access and even slower adoption. Yet Japan's i-Mode service, introduced in February 1999 by Japan's mobile telecom giant NTT DoCoMo Inc.and now being used by Tsutayahas attracted more than 30 million subscribers, or about one-fourth of Japan's population.

Critics attribute i-Mode's success to Japan's funky penchant for gadgetry and its sprawling metropolitan areas, which force millions of people onto commuter trains with little to do for as many as four hours a day. But i-Mode's popularity has more to do with DoCoMo's understanding of how to set up a mobile data serviceand the savvy of a handful of companies, like Tsutaya, that have figured out how to weave i-Mode service into an already smart mix of techno weaponry in the rivalry for market share. (See "Thinking Out Loud.")

It helps, of course, that Japan has one of the highest mobile phone usage rates in the worldone mobile phone for every two peopleand the most advanced mobile telecommunications infrastructure. It may take a while for the U.S. to catch up, says Mark A. Berman, a telecom analyst at Credit Suisse First Boston in Tokyo. But the trend is irreversible: By 2004, researchers predict, the number of mobile Internet users around the world will rise to around 1 billion, from 200 million today, chiefly in Europe and Japan. Says Adrian Slywotzky, an author, lecturer and consultant on digital businesses: "Wireless mobility is the technology strategy of the decade. Anyone not thinking about how wireless can help their company is simply not looking ahead."

How does Tsutaya do it? Partly, it's due to a sizeable customer database, which parent CCC built in 1994, way ahead of most rivals. But Tsutaya has also figured out new ways to use that information. Tying it to mobile phones has put so-called customer relationship management into hyper-drive. By combining data with mobility via i-Mode service, Tsutaya is able to maintain a dynamic, always-on picture of individual entertainment tastes and preferencesand then personalize product offeringsthe elusive dream of one-to-one marketing come home to roost. Says Kramer: "When mobile commerce came along, Tsutaya asked, 'How can we now use our database in a new way to serve customers?'"

How does it all work for the consumer? Suppose your 13-year-old daughter bought the latest CD by *NSYNC, a popular boy band. When the band's next release is available, Tsutaya Online (TOL), Tsutaya's wireless i-Mode site, will e-mail you a digital music clip. Similarly, fans of movie star Nicole Kidman can be sent a review of her new movie, "Birthday Girl,'' and then track its availability on video via the Web or mobile phone. And now, Tsutaya also has what it calls a "recommendation engine" that can match the title of the films you last watched and their typesentimental, violent, scaryand then suggest something new. Want a love story, tear-jerker or horror film? Happy ending or sad? TOL lets you chooseand then uses that information to further segment your tastes and off-work interests.

Tsutaya's information-intensive business model helps to control costs, too. Managers can quickly identify slow-moving video rentals, for example, so they can be sold off to a subsidiary. Telling Tsutaya customers how many videos of a certain title are in stock at any given time also cuts down on wasted store visits by customers. Furthermore, it saves the company money by reducing the time clerks spend checking on product availability.

Still not convinced? Check out the numbers. TOL is Japan's most popular online entertainment site, with 50 million page views per month. On average, Tsutaya's online customers spend 9 percent more per month than those who shop offline, and people who are e-mailed movie reviews and video clips via the Web and mobile phones tend to rent two to five times more films than nonsubscribers. TOL's online services also have helped to increase brick-and-mortar parent Tsutaya revenues, and TOL, too, is in the black. Online operating profits have grown from minus $2.8 million in fiscal 2000 to $357,283 for fiscal 2001a first-time profit for TOL, despite Japan's sluggish economy. And for the fiscal year ending in March 2002, parent CCC expects to rack up the equivalent of $13.6 million in net profits on revenues of $795.6 millionup by 6.7 percent over last year, thanks in large part to Tsutaya.

Tsutaya wasn't always so bold. Its digital strategy was the product of a management mishap. Masuda founded Culture Convenience Club as a video rental store in November 1985; by the 1990s, it had grown into the largest video, game, book and CD retail chain in Japan. But Masuda wasn't content to sit still.

In 1996, he saw an opportunity in DirecTV, the satellite-broadcasting network that began operations in Tokyo in 1997. He became president of DirecTV in Japan, and took a team of CCC employees with him. But the relationship between CCC and DirecTV soured quickly, and by late 1998, according to TOL business strategy chief Takashi Miya, some of the 20 CCC executives that moved to DirecTV with Masuda were suddenly laid off internally, meaning their jobs were eliminated but they remained on the payroll. While that was bad for the executives, it provided the impetus for a digital strategy for the chain. Masuda soon redeployed them to create an online strategy for the entire chain as part of a new venture known as Tsutaya Online. "It all started by accident, really," admits Masuda. "Without the DirecTV disaster, there might not have been any Tsutaya Online." The whole experience, he says, "opened our eyes to the Internet and mobile commerce."

Tsutaya was late to hop onto the Internet bandwagon. "We were late in getting into PC-based online shopping, so we had to distinguish ourselves somehow," recalls Kouichi Shinozaki, general manager of mobile strategies for TOL. "At that time, Internet-equipped cell phones were just coming out, and people seemed to like them. So we decided to make our push in cell phones instead," he added. Proof, in retrospect, that first-mover advantage isn't always a plus in the long-run.

From the start, Tsutaya's push to go digital was always a collaboration between technology and marketing. Jun Hongo, TOL's chief technology officer, oversaw the early strategy, and he quickly assembled a mobile Internet team, composed of a mix of former bureaucrats, ex-investment bankers, and marketing and technology recruits from Panasonic Corp. The team met frequently with the marketing group to outline a digital strategy to distinguish Tsutaya.

Most of the technology they looked at was pretty simple: i-Mode sites use HTML, the programming language used on the PC-based Internet; the servers were supplied by NEC, and the database was managed by Oracle software. But there was intense debate over strategy. Some members of the mobile team wanted the site to allow customers to buy online; others feared that the Internet would cannibalize Tsutaya's traditional business. Marketing surveys taken in early 1999 bore out the dilemma: Most customers surveyed weren't even interested in shopping online. Only 8 percent actually wanted to buy CDs advertised online; 92 percent preferred to visit a real store.

Ultimately, a hybrid strategy emerged. "The data convinced us that most people use the Internet to collect information in order to make the decision to buy a CD, but the actual transaction was made at the storefront," says Miya. "But the 8 percent who wanted to buy onlinethose were latent customers. They were too busy to come to our stores, so they'd either buy online or not at all. It was a hidden market, one not tapped yet by us. So it was this untapped marketnot the cannibalizationwe ended up fearing we'd lose from the rise of the Internet."

Today, Tsutaya's Web site combines free and paid content, and essentially serves as a 24-hour customer tracking tool: The company's servers record nearly every move users make on TOL sites in near real-time. By getting customers to register their personal data online, the site has also created another database of information on 2.15 million Web-based subscribers, about 60 percent of whom access the site from a mobile phone. And depending on the urgency of the request, TOL can answer a set of questions posed by a movie studio or artists' rep about the demand curve on their products within 24 hours. At the same time, the data allows Tsutaya to tailor its marketing to the customer, while constantly collecting data on his or her behavior.